Waiving the VAT Exemption When Buying Property in Spain: A Practical Guide from Sotogrande — Part II

Understanding the VAT exemption waiver Spain applies to property sales is essential if you’re buying from a business in a second or subsequent transfer, since the transaction is, as a general rule, exempt from VAT (IVA) and subject to Transfer Tax (ITP) unless the seller waives that exemption, and this decision carries tax consequences worth understanding well, both at the time of purchase and in the years that follow.

This guide develops in detail a topic we only touched on in our earlier article on signing a property purchase before a notary in Spain: what waiving the VAT exemption actually involves, how the reverse charge mechanism works, and what the capital goods VAT adjustment regime is.

When a business sells a property in a second or subsequent transfer, it can legally waive the VAT exemption it would otherwise be entitled to. By doing so, the transaction becomes subject to VAT instead of ITP.

Why would this be of interest? Because it can be more tax-efficient for the transaction to be taxed under VAT rather than ITP:

• ITP normally constitutes a final tax cost for the buyer — once paid, it isn’t recovered.
• VAT, on the other hand, can be deductible in full or in part, depending on the buyer’s business activity.

The waiver can also be relevant for the seller, if the property is still within the adjustment period for the VAT deductions they applied when acquiring or constructing it.

For the waiver to be possible, the relevant legal requirements must be met, including the buyer’s business status and the rules regarding their right to deduct the tax. If you’re unsure whether your transaction meets these requirements, it may help to first review our guide on buying directly or through a real estate agency in Sotogrande, where we explain how a local agency can help coordinate this kind of decision with your advisor.

In these cases, a mechanism known as the reverse charge is usually applied, which means that:

• The seller does not physically collect VAT in the ordinary way
• The buyer self-charges the tax
• The buyer can only deduct it to the extent they are entitled to
• The deed becomes subject to AJD (Stamp Duty)
• The waiver and the corresponding declarations must be properly documented

This structure can be tax-efficient for a buyer with a full right to deduct. However, it can work against a buyer when the property is intended for an exempt activity, private use, or an activity that only allows partial deduction — in those cases, the input VAT won’t be recoverable to the same extent, and it’s worth analysing this carefully before opting for this route.

When a business deducts VAT on the acquisition of a property, that deduction can become subject to the capital goods adjustment regime.

For land and buildings, the adjustment period is, as a general rule, ten years: the year of acquisition or entry into use, plus the following nine calendar years.

When Might an Adjustment Be Necessary?

During that ten-year period, part of the VAT originally deducted may need to be adjusted for various reasons, for example:

• If the use of the property changes
• If the applicable deduction percentage changes
• If the asset is sold under a different tax treatment
• If the property ceases to be used for the business activity

A Common Myth: The Five-Year Rule

There is no general rule, as is often assumed, requiring the property to be sold or “moved on” within five years. What matters here is maintaining the purpose that justified the original deduction and the applicable adjustment regime throughout the full legal period (the ten years mentioned above).

A purchase involving a waiver of the VAT exemption should be reviewed with a tax advisor before signing, and also throughout the entire holding period of the asset, precisely because the circumstances that trigger an adjustment (a change of use, a change of activity, an early sale) can arise years after the initial purchase.

At Open Frontiers, we routinely coordinate this kind of transaction alongside lawyers and tax advisors, so that buyers and sellers arrive at signing with this issue already resolved. If you also have questions about how the tax value of a property is determined in these transactions, you can consult our analysis of rising cadastral values in Sotogrande.

Who decides whether to waive the VAT exemption?

The waiver is the seller’s decision, although in practice it’s usually agreed between both parties during negotiations, since it directly affects the costs and taxation of the transaction for the buyer.

Can the buyer always deduct the input VAT?

Not necessarily. The right to deduct depends on their business activity and on whether the property is used for operations that generate that right. If the intended use is an exempt activity or private use, the deduction may be limited or may not exist at all.

What happens if I sell the property before the adjustment period ends?

Part of the VAT deducted at the time may need to be adjusted, depending on how the new transfer is taxed. This is one of the situations where specific tax advice is worth getting before signing.

How long does the adjustment period last?

As a general rule, ten years for land and buildings: the year of acquisition or entry into use, plus the following nine calendar years.

Luis de Pedro is a lawyer specialising in real estate law. He spent over 30 years as Head of the Legal Department and Legal Advisory at Sotogrande, S.A., taking part in the company’s evolution from the era of its founding families, McMicking and Zóbel, through to its later acquisitions by NH Hoteles (Cofir), Cerberus, and Orion.
His professional experience includes residential and corporate purchase transactions, real estate contracting, due diligence processes, corporate structures linked to real estate assets, and advising national and international buyers and investors.
GP Abogados

Legal notice: This article is provided for informational purposes only and does not constitute legal, tax, or accounting advice. The treatment of each transaction depends on its specific circumstances and the regulations in force at the time of the transaction. Before making any decision on waiving the VAT exemption or any related tax matter, independent professional advice should be obtained.